Poor management of climate risks could lead to D&O and E&O claims – Kennedys

Organisations and governments could see increased litigation – and associated claims on directors’ and officers’ (D&O) or errors and omissions (E&O) insurance policies – as a result of climate change-related risks, according to a new report published by law firm Kennedys today (13 July 2022).

The report, entitled Rewriting the risk: Addressing the challenges of climate change, identified three key types of climate-linked litigation that could impact insurance provision and claims:

• Lawsuits against states that challenge the adequacy of climate policies.
• Lawsuits against companies about their carbon dioxide (CO2) emissions and potential associated harms.
• Litigation strategies from activist shareholders and employees around greenwashing and the non-disclosure of climate-related risks.

Kennedys noted that this litigious behaviour is supported by “the notion of a climate change duty of care”, which “places the onus on public and private actors to exercise their powers to prevent harm to a population that can be directly linked to climate hazards resultant from the actors’ actions or activities”.

Speaking on the report findings, John Bruce, partner at Kennedys, said: “The growth in sustainability and climate-related issues impacts on all types of insurance policies for the simple reason that climate risks are a constant, growing concern.

“From an underwriting perspective, changes in practice will be required to price climate risks more accurately in the future. (Re)insurers - and the businesses they insure - that are ahead of the transformation game, like those at the forefront of the industrial revolution and the move to a digital economy, are much more likely to succeed.”

Getting underwriting right

In terms of the mitigating action already being taken by insurers, Kennedys’ report stated that firms have so far worked to strengthen their senior management’s accountability around tackling climate-related risks, embedded climate risks within solvency regimes, improved climate transparency and reporting, as well as looked to set the right price for underwriting natural catastrophes.

The report said: “From an underwriting perspective, one of the key challenges will be to establish the right price for the level of risk.

“There is an inherent risk of mispricing natural catastrophe risks as underwriting models need to be recalibrated, moving from the use of historical, backward-looking data to a more forward-looking approach to risk assessments.

“A consequence of mispricing is that over the last five years, most (re)insurers have made losses underwriting natural catastrophe business, particularly those [that] are writing global programmes. This is part of a decades long trend, where weather-related losses have increased since 1970.”

Alongside risk management, insurance firms also have a “significant role to play” when it comes to investments and ensuring that these “flow into business activities which support green transition”.

More to do

Kennedys concluded its report with six recommendations around managing environmental risks:

1. Embed climate mitigation within governance changes and senior leadership.
2. Advocate enhanced annual climate emission disclosures, which includes data on specific emissions sources and associated biodiversity risks.
3. Develop extended net zero plans which consider climate impacts across the business value chain, incorporating sustainable procurement policies.
4. Reduce emissions across the value chain by implementing and disclosing details of decarbonisation measures, ensuring that externally sourced inputs are aligned with business sustainability targets.
5. Take steps to ensure conduct is fully compliant with objectives and insureds do not make misleading statements or pledges in the rush to adopt sustainable practices.
6. Seize the opportunities around green technology, green building and renewable energy rather than try to resist the transition towards long-term sustainability.

Deborah Newberry, director of corporate affairs at Kennedys, said: “The evidence of climate action being taken in many countries is deeply encouraging. However, it is clear that all sectors have an important role to play in achieving further and substantial emissions reductions.

“Addressing the challenges of climate change requires true innovation – in institutions and organisations - understanding and thought, technology and leadership.

“In turn, the right policies, infrastructure and regulatory landscape are required to enable [businesses] to help meet the targets.”